Where are we now?

The UK has seen varied levels of intensity from the effect of the housing bubble burst and the global recession. Although it may be hard to determine how sever the effect has been for sub-regions in regards to housing prices due to the lack of nationally recorded evidence, there is a visible difference. With stronger mini-economies like Aberdeen and London due to their exposure to specific markets, they have recovered very quickly after the bust, other regions like Northern Ireland and Wales felt the full force and the prolonged depression due to their lack of economic stimulate.

Over recent years, sub-regions in Scotland, there has been an increase in information being recorded and presented for analysis. Accompanying this, it hasn’t been all bad, with a redistribution of wealth and the decline of markets, some groups with the economy have benefited such as the first time buyer. Many first time buyers were pushed out of the market due to the excessive growth rates that housing price experienced but upon the collapse this changed everything giving them the leverage to bargain and acquire what is normally the most valued asset in many individuals asset portfolios.

Unfortunately though, history seems to always repeat itself. With property booms across the globe and clear indication of their presence, Governments are faced with the dilemma to either prick the bubbles or ride them out, with most riding them out. Historical events like the Great Depression which was a pricked bubble, caused one of the worst financial and economic contractions ever recorded and this has installed a wary defence mechanism in Government to avoid pricking asset bubbles.

5 years after the event, where are we now?

According to reports and predictions, the UK isn’t out of the water yet. With overall all GDP down 0.3% in Q4 2012 (Webb, 2013), there is optimism among some economists, for instance PwC’s John Hawksworth, chief UK Economist, who predicts a 2% growth in the economy (PWC, 2012). Although the Bank of England has been discussing more drastic approaches to boost the economy such as negative interest rates and long-term commitment to bond buying according to Reuters (2013). In the end only time will tell and it depends on the Government to stimulate the economy and lift us out of this slump, housing has greatly improved but the economic situation has far to go.

References:

Pricewaterhouse Coopers (November 2012) UK Economic Outlook: Summary report - November 2012, Available at: http://www.pwc.co.uk/the-economy/publications/uk-economic-outlook/ukeo-november-2012-summary.jhtml (Accessed: 28 February 2013).

Dominic Webb (2013) Components of GDP: Economic Indicators page - Commons Library Standard Note, London: Parliament.

Reuters (February 2013) Britain's Old Lady shows appetite for new thinking, Available at: http://uk.reuters.com/article/2013/02/28/uk-boe-focus-idUKLNE91R01Q20130228(Accessed: 28 February 2013).

Northern Ireland, a problem child

Graph 1 - Source: ONS (2011) & Nationwide (2013)

Up to 2009, housing prices were still declining within Northern Ireland according to Graph 1, while gross disposable household income was gradually beginning to recover. Attanasio et al. (2009) discovered that consumption should correlate with movement in house prices; however it was found that during a boom and briefly following a bust, they will deviate away from each other.

Up to 2009, housing prices were still declining within Northern Ireland according to Graph 1, while gross disposable household income was gradually beginning to recover. Attanasio et al. (2009) discovered that consumption should correlate with movement in house prices; however it was found that during a boom and briefly following a bust, they will deviate away from each other.

Graph 2 - Source: Nationwide (2013)

Graph 2 presents the status of the UK house market on a regional basis. Northern Ireland has quite a prominent difference in comparison to the UK average and other regions which have followed a similar line to the UK. Norwood (2008) cites that house prices leading up to 2008 had grown around 160% over five years, three times the rest of the UK. Combining the crash in house prices and low economic growth across the UK, Northern Ireland felt a multiplier effect with construction of affordable social housing almost halted and soaring unemployment. An economist from the Bank of Ireland, cited by Norwood (2008) said that the market was “stricken with relative inactivity uncertainty and nervousness over valuations"

However there was a silver lining out of this. First time buyers rejoiced as the housing bubble burst, with property values dropping and interest rates at record level lows housing affordability was once again in the grasps of the first time buyer.

In their study, McGreal, Brown & Adair (2010) targeted the Belfast Metropolitan area to decipher the factors that caused such a massive collapse of the housing market. They identified that the key driving force for the expansion of the bubble or at least the foundations for it, was the growth of income, very low unemployment, low interest rates and strong macro-economic influences from the UK accompanied by cross border investment relations with the Republic of Ireland.

McGreal, Brown & Adair (2010) results demonstrate the deviation from the asking price of houses and the actual sale value which I have attached, as Appendix 1 & 2. From these results they were able to pinpoint when the bubble was vigorously expanding as the both the asking and the sale value prices shared similar tracking during normal market conditions while during a bubble values where higher and more varied.

Attanasio, O.P., Blow, L., Hamilton, R. And Leicester, A., 2009. Booms and Busts: Consumption, House Prices and Expectations. Economics, 76(301), pp. 20-50.

McGreal, S., Brown, L., & Adair, A. (2010). List price and sale price variation across the housing market cycle. International Journal of Housing Markets and Analysis, 3(2), 89-99. doi: http://dx.doi.org/10.1108/17538271011049731

Nationwide, 2013. Housing Price Index (HPI). 1. England: Nationwide.

Norwood, G 2008, 'PRICES HEAD DOWNHILL', Estates Gazette, 820, pp. 99-101, Business Source Premier, EBSCOhost, viewed 28 February 2013.

Office of National Statistics, 2011. Regional Gross Disposable Household Income (GDHI) 1995-2009. 3. England: Office of National Statistics.

Appendix 1 - List Price vs Sale Price 

Appendix 2 - Standard deviation between list price and sale price

UK Regional Analysis

Source: Nationwide Statistics & Office of National Statistics

This graph displays the relationship between the UK and its sub-regions, except Wales which follows an almost identical path to Scotland, in terms of house values in comparison to movements in GDP within the UK.

Looking at these statistics, it’s apparent that there is a significant difference between not only the value of houses across the UK, but the rate at which they fell and recovered, notably London which enjoyed a very quick recovery, while Northern Ireland still recedes.

Northern Ireland and Scotland are both under performers in comparison to the rest of the UK according to these figures, but on a sub-regional level how does this differ?

With the term, mini economies, being used to describe certain areas such as Aberdeen and London, which barely noticed the effect of the recession according to GVA values, it is hard to pin point the exact effect on housing because not enough sub-regional data is available to determine such an impact. However, going by the GVA it is believed that Aberdeen can attribute its success down to special circumstances according to Hacker Young (2012) who believe it is due to the exposure to the oil and gas industry, much like London is to the financial industry.

Rank	Town/City	GVA 2008	GVA 2009	Change
		(£ per head)	(£ per head)	%
1	Aberdeen	28,422	28,731	1.09%
2	Edinburgh	35,134	34,950	-0.52%
3	London	34,964	34,779	-0.53%
31	Belfast	30,819	29,816	-3.25%
	UK Average	20,911	20,341	-2.73%

Source: Hacker Young, 2012

However both Madsen (2012) and Valadez (2010) highlight that there should be a correlation between GDP and HPI or so it was within the US, it doesn’t appear to be the case with the UK, or possibly it is due to the special circumstance of the recession.

References:

Hacker Young. (2012). Aberdeen Only UK City to Create More Wealth This Year. Available: http://www.uhy-uk.com/resources/news/aberdeen-only-uk-city-to-create-more-wealth-this-year/. Last accessed 26 Feb 2013.

Madsen, JB 2012, 'A behavioral model of house prices', Journal Of Economic Behavior & Organization, 82, 1, pp. 21-38, Business Source Premier, EBSCOhost, viewed 26 February 2013

Nationwide (2012) UK House Prices Adjusted for Inflation, London: Nationwide Statistics.

Nationwide (2012) UK Monthly Indices (Post '91), London: Nationwide Statistics.

Office of National Statistics (2013) UK GDP since 1948, London: Office of National Statistics.

Valadez, RM 2010, 'The housing bubble and the GDP: a correlation perspective', Journal Of Case Research In Business & Economics, 3, pp. 1-18, Business Source Premier, EBSCOhost, viewed 21 February 2013.

Wild West of Mortgage Loans

Senator Schumer of New York said "the subprime market is the Wild West of mortgage loans" (Buttimer, 2011), an adequate euphemism I quite like.  You can see from this graph from S&P/Case Shiller HPI, the US housing market suffered a devastating blow when the subprime market collapsed. As I’m sure your aware this landslide was the dominating factor leading to the global recession. Much like the UK, the US market felt the effects of upward moving mortgage interest rates and downward shifting house values. However, unlike in the UK, US citizens can simply walk away from their debt with great ease. By popping the keys through the letter box of the house it was no longer the resident’s responsibility in other words relinquished ownership of said house, leaving the mortgage provider to foot the bill so to speak.

But how does it all tie in? To cite Schnabl & Hoffmann (2008) “The US subprime market crisis is shattering the world financial system.” But what did they mean? When the US housing bubble burst, it caused securities tied to US mortgages, or Mortgage Backed Securities (MBS), to crash which in turn had repercussions on financial institutions across the world. This was the catalyst for the economic contractions have seen ex post of the crash.

Buttimer, R.J. 2011, "The financial crisis: imperfect markets and imperfect regulation", Journal of Financial Economic Policy,vol. 3, no. 1, pp. 12-32.

Schnabl, G, & Hoffmann, A 2008, 'Monetary Policy, Vagabonding Liquidity and Bursting Bubbles in New and Emerging Markets: An Overinvestment View', World Economy, 31, 9, pp. 1226-1252, Business 

Source Premier, EBSCOhost, viewed 24 February 2013.

Standard & Poors (2013) S&P/Case-Shiller Home Price Indices. [press release] January 29, 2013

Catch 22

Upon collapsing the housing market was caught in a “debilitating scissor effect” (Schwartz & Seabrooke 2009) that amplified its vulnerabilities to the financial contamination emanating from the banks. The truth hurt, as banks came clean about their exposure to the property market; the real mess because to appear on the balance sheets.

As banks lost further confidence in one and other, interbank credit markets became waste lands, no one was willing to step in and lend to anyone. Borrowing became more expensive because of lack of supply, and this meant mortgages rates soared.

Homeowners found themselves in a catch 22 scenario, with a house that was rapidly losing its value, and a mortgage debt that was ever growing, they couldn't justify selling but they also couldn't afford to keep it. In effect this trapped them in a spiral of having to use more and more of their take home pay simply to meet the repayment schedule of a house that is destroying their accumulated asset wealth as its price.

Schwartz, M & Seabrooke L. (2009). Boom and Crash: The Politics of Individual Subject Creation in the Most Recent British House Price Bubble. In: Shaw, T The Politics of Housing Booms and Busts. England: Palgrave Macmillan. 52-75.

A house of cards...

The housing market was built like a house of cards, in the UK, the US and across the globe housing markets collapsed in just a blink of an eye but we know that.

It is easy to be wise after an event, but hindsight did suggest that there were indication of an accident waiting to happen. The interbank lending market had dried up due to fears of bad debt which might have been lurking on banks’ balance sheets without anyone really knowing. Over lending was considered acceptable because it enable access to a market which was ever expanding. This was the first inclination that there was a bubble. Labour encouraged home owners to see their home as a financial asset. Unfortunately, as Labours mistake, they were tied to the collapse.  This statement acted as a catalyst that portraying housing prices as assets which are susceptible to speculative and support from the market.
Schiller, 2000, states that “a bubble implies a purely speculative price phase in which the psychology of crowds allows individual investors to overvalue systematically a particular asset or group of assets.”

Schiller has a valid point in that applying his thought, there was social significance attached to living in the “right” place and being able to afford a more expensive property, thereby fixing your place in society because “mines worth more” or something along those lines at least. The integration of the housing market into the welfare model & social investment norms was the most important facet of the house price bubble according to Schwartz and Seabrooke (2009)

As the welfare model developed, family homes were considered to be a secure investment for the future, or that was one of the lessons imposed by Adult Financial Literacy Advisory Group, an agency responsible to the Department of Education and Skills, essentially it was trying to turn passive recipients of welfare rights into asset managers. Attempting to pass this responsibly onto innocent bystanders was a mistake because everyone can’t be a successful asset manager or we wouldn't need banks or financial advisors.

Schiller, R (2000). The Irrational Exuberance. 4th ed. New Jersey: Economic Affairs. 59-69.falls

Schwartz, M & Seabrooke L. (2009). Boom and Crash: The Politics of Individual Subject Creation in the Most Recent British House Price Bubble. In: Shaw, T The Politics of Housing Booms and Busts. England: Palgrave Macmillan. 52-75.

Consumption & Housing Prices

McGreal, Brown & Adair (2010) state that "housing is a multi-dimensional commodity embracing both consumption and investment; hence, the price asked for a property (list price) or a price achieved (sale price) reflect not only the attributes of the property." They indicate the tension within the house market due to competing interests, which in-turn affects the prices. As an investment, housing markets are susceptible to cycle, featuring bubbles of booms and busts.

Source: ONS (2009) & Nationwide (2013)

The UK bubble began to form around 1998, but saw a slight decline between 1999-2000. Following this the boom really began, but growth rate began to slow down, which indicated a possible economic denial between 2003 & 2004, but 2006/2007, the bubble burst. A study produced in 2009 by 4 individuals, Razio P. Attanasio,W Laura Blow,Z Robert Hamilton and Andrew Leicester using housing price growth & consumption growth proposed 3 hypotheses; house price increases, increased household wealth & consumption; house price growth reduced constraints on debt due to increased collateral for homeowners and house prices and consumption are linked by common factors. This sounds very similar to the American bubble. You’d think they would have learnt from the British seeing as the UK bubble burst a few years before.

Source: ATTANASIO, ORAZIO P. et al. (2009)

Cambell and Cocco (2007) and Attanasio, et al. (2009) found in their findings that owner-occupiers who intend to remain in their accommodation for a prolonged time were hedged against price fluctuations because they weren't exposed to the buyers’ market. However, this meant that first time buyers couldn't afford housing which was the case during the bubble.

 

Notes:

1: GDHI (Gross Disposable Household Income)

References:

Attanasio, O.P., Blow, L., Hamilton, R. And Leicester, A., 2009. Booms and Busts: Consumption, House Prices and Expectations. Economics, 76(301), pp. 20-50.

McGreal, S., Brown, L., & Adair, A. (2010). List price and sale price variation across the housing market cycle. International Journal of Housing Markets and Analysis, 3(2), 89-99. doi: http://dx.doi.org/10.1108/17538271011049731

Nationwide, 2013. Housing Price Index (HPI). 1. England: Nationwide.

Office of National Statistics, 2011. Regional Gross Disposable Household Income (GDHI) 1995-2009. 3. England: Office of National Statistics.

Sinai, T. and Souleles, N. S. (2005). Owner-occupied housing as a hedge against rent risk. Quarterly Journal of Economics, 120, 763–89.